PRAGUE, Aug 6 – The Czech National Bank kept interest rates unchanged on Thursday and signalled they were likely to stay on hold until at least mid-2021 after a series of deep cuts to borrowing costs to try to limit the coronavirus pandemic’s economic fallout.
With inflation staying stubbornly elevated even amid a record hit to the economy, the central bank has paused on rates pending an economy recovery that bank forecasts on Thursday showed could be slower than previously expected.
The seven-member board on Thursday voted unanimously to leave the key two-week repo rate at 0.25%, as forecast in a Reuters poll this week as markets have also shifted to expectations of steady rates.
Governor Jiri Rusnok reiterated that a recent inflation spike was temporary and it was hard to see a return to tightening policy before the middle of next year. He added the board did not debate any potential unconventional policy tools.
“In the context of the macroeconomic situation, I can hardly imagine (raising rates), definitely not before the middle of the next year,” he told reporters.
“I have got a feeling that recovery won’t be easy,” he said.
The central bank has slashed its main rate by 200 basis points since the pandemic hit Europe in March and pushed economies into lockdown.
The Czech economy contracted a record 10.7% year-on-year in the second quarter, slightly milder than expected.
Inflation, though, was at a headline rate of 3.3% in June, outside the bank’s target range of 1-3%.
The bank’s updated macroeconomic forecast saw inflation remaining outside that range until the beginning of next year before falling close to the mid-point target of 2% in the monetary policy horizon.
It also forecast a slightly deeper 8.2% economic contraction in 2020 before a return to growth of 3.5% next year, half a percentage point slower than before.
The new outlook expected the crown to continue firming and the bank said its current development was among risks and uncertainties to the overall forecasts.
The currency rallied this week to its highest since mid-March but retreated on Thursday, losing 0.5% to 26.22 to the euro by 1435 GMT. (Reporting by Robert Muller and Jason Hovet; editing by Philippa Fletcher)